By Cherie Parkes
An interest rate rise could be on the cards in the lead up to the general election, according to one of Australia’s leading economists.
Speaking on ABC Radio National's AM show ahead of yesterday's Reserve Bank of Australia's board meeting, Professor Warwick McKibbin said an immediate rate rise was unlikely but possible as we draw towards the September poll.
Professor McKibbin, a former RBA board member and Chair of Public Policy in the College’s Crawford School, said that while global confidence is stabilising, he recognises crises could occur.
"There is still potential for a crisis emanating from Europe and the potential for crisis emanating from the USA. There are some triggers out there for bad news but at the moment, I think there is a lot of good news around," he said.
Professor McKibbin talked down the risk of inflation, saying that potential threats to the national economy were most likely to come from asset price inflation.
"The bigger risk, I think, is speculative activity driving up the price in assets and then having a subsequent collapse in those prices. That's a bigger concern and I think that is a real problem that monetary policy has to confront head on."
When asked if the current cash rate is sustainable, Professor McKibbin said: "I think a three per cent cash rate probably will be where it is now for a few more months or it will be rising by the end of the year."
Professor McKibbin said the bank wouldn't flinch from raising rates ahead of the election if it thought necessary, as it did in 2007.
"I think that they will [remain independent]. I was actually on the board in 2007... in the end it was the national interest that mattered and that's what the bank will do when the time comes," he said.
Professor McKibbin added that it is "absolutely the economy" rather than politics that comes first in the bank’s decision-making.
More: Listen to Professor McKibbin's interview on the ABC News website.